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Stocks Close Higher After Hefty Rate Cut

Stocks bounced around but finally finished in the black today after the Federal Reserve's unexpectedly large interest-rate cut of half a percentage point seemed to leave investors wondering about the outlook for the economy.

The three main market indexes moved between small gains and small losses ahead of the announcement by the Fed policy makers at 2:15 p.m. Eastern time. Stocks rallied immediately after the announcement of the rate cut, then fell, and then reversed course again and climbed higher for the rest of the session, as positive interpretations of the Fed rate cut won out for now.

The Dow rose 92.74 points, or 1.1 percent, to close at 8,771.01. After the rate cut announcement, the Dow made a 209-point swing down to as low as 8,590.19 and as high as 8,800.

Among the stocks leading the market higher were drug companies, which many analysts suspect will benefit from Republican control of the Congress because it is now less likely to place any price caps in a prescription drug bill. Pfizer rose $1.02, to $33.64, while Merck jumped $1.80, to $56.

Military contractors also advanced, with Boeing climbing $2.06, to $33.58, and Lockheed Martin gaining $1.30, to $54.95.

All three market indexes are still below the peaks they reached during the summer rally, which ended in late August as the overall stock market plunged to a 5 1/2-year low in the second week of October.

"It was a good day," said Joseph Liro, an economist and market analyst at Stone & McCarthy Research Associates. The combination of the fiscal stimulus now possible from Congress after the Republican takeover of the Senate in Tuesday's election and the Fed's rate cut "put a charge into the market."

He said the rally after the Fed's rate cut surprised him because he had expected that "investors would take profits after a good four weeks" that saw the Dow rise 20 percent and the Nasdaq composite index climb 27 percent.

There are several reasons why the Fed's half-point rate cut was read positively by investors, and several reasons why it could have initially been interpreted negatively.

On the positive side, the half-point cut, instead of the expected reduction of a quarter of a percentage point, indicated that the Fed's policy makers wanted to be aggressive in their effort to rekindle the economic recovery, which many forecasts expect to slow to a 1 percent to 2 percent growth rate in the fourth quarter.

In addition, members of the Federal Open Market Committee made clear in their statement that they thought that the outlook for the economy was positive and that this current slowdown was just a "soft spot."

"The committee continues to believe that an accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, is providing important ongoing support to economic activity," the Fed said, adding that "in these circumstances, the committee believes that today's additional monetary easing should prove helpful as the economy works its way through this current soft spot."

One the negative side, the bigger-than-expected rate cut has some investors asking why it was needed. One answer is that the Fed's policy makers may believe the economy is in more trouble than many investors think.

Another reason for some dismay among investors was the Fed's disclosure that it had shifted its outlook for the economy to one of balanced risks between slower growth and higher inflation. To some investors, this means that it is less likely that there will be another rate cut in December, when Fed officials are next scheduled to met.

This shift to a balanced outlook "is clearly intended to warn the market not to extrapolate to a series of additional large cuts," said Lewis Crandall, chief economist at Wrightson Associates.

tocks bounced around but finally finished in the black today after the Federal Reserve's unexpectedly large interest-rate cut of half a percentage point seemed to leave investors wondering about the outlook for the economy.

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The three main market indexes moved between small gains and small losses ahead of the announcement by the Fed policy makers at 2:15 p.m. Eastern time. Stocks rallied immediately after the announcement of the rate cut, then fell, and then reversed course again and climbed higher for the rest of the session, as positive interpretations of the Fed rate cut won out for now.

The Dow rose 92.74 points, or 1.1 percent, to close at 8,771.01. After the rate cut announcement, the Dow made a 209-point swing down to as low as 8,590.19 and as high as 8,800.

Among the stocks leading the market higher were drug companies, which many analysts suspect will benefit from Republican control of the Congress because it is now less likely to place any price caps in a prescription drug bill. Pfizer rose $1.02, to $33.64, while Merck jumped $1.80, to $56.

Military contractors also advanced, with Boeing climbing $2.06, to $33.58, and Lockheed Martin gaining $1.30, to $54.95.

All three market indexes are still below the peaks they reached during the summer rally, which ended in late August as the overall stock market plunged to a 5 1/2-year low in the second week of October.

"It was a good day," said Joseph Liro, an economist and market analyst at Stone & McCarthy Research Associates. The combination of the fiscal stimulus now possible from Congress after the Republican takeover of the Senate in Tuesday's election and the Fed's rate cut "put a charge into the market."

He said the rally after the Fed's rate cut surprised him because he had expected that "investors would take profits after a good four weeks" that saw the Dow rise 20 percent and the Nasdaq composite index climb 27 percent.

There are several reasons why the Fed's half-point rate cut was read positively by investors, and several reasons why it could have initially been interpreted negatively.

On the positive side, the half-point cut, instead of the expected reduction of a quarter of a percentage point, indicated that the Fed's policy makers wanted to be aggressive in their effort to rekindle the economic recovery, which many forecasts expect to slow to a 1 percent to 2 percent growth rate in the fourth quarter.

In addition, members of the Federal Open Market Committee made clear in their statement that they thought that the outlook for the economy was positive and that this current slowdown was just a "soft spot."

"The committee continues to believe that an accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, is providing important ongoing support to economic activity," the Fed said, adding that "in these circumstances, the committee believes that today's additional monetary easing should prove helpful as the economy works its way through this current soft spot."

One the negative side, the bigger-than-expected rate cut has some investors asking why it was needed. One answer is that the Fed's policy makers may believe the economy is in more trouble than many investors think.

Another reason for some dismay among investors was the Fed's disclosure that it had shifted its outlook for the economy to one of balanced risks between slower growth and higher inflation. To some investors, this means that it is less likely that there will be another rate cut in December, when Fed officials are next scheduled to met.

This shift to a balanced outlook "is clearly intended to warn the market not to extrapolate to a series of additional large cuts," said Lewis Crandall, chief economist at Wrightson Associates.

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A version of this article appears in print on November 6, 2002 of the National edition with the headline: Stocks Close Higher After Hefty Rate Cut. Order Reprints|Today's Paper|Subscribe